Court criticises KPMG over collapse of New Century

KPMG, one of the "big four" global accounting firms, is facing criticism over its role in the collapse of New Century Financial, the sub-prime lender whose bankruptcy last year was an early clue to the severity of the credit crisis.

A court-appointed investigation found that KPMG employees sanctioned some of the dubious accounting practices that allowed New Century to hide its sloppy lending standards and mounting financial risks.

The report is the first time that an auditor has attracted a share of the blame for losses in the mortgage crisis, and it suggested that New Century's creditors or the trustee overseeing its liquidation could sue KPMG to recover some of those losses.

New Century was named one of America's fastest-growing companies in 2003 and 2004, and at the height of the credit bubble it was the second-biggest lender to so-called "sub-prime" borrowers, people with poor or incomplete credit histories.

Then, in February last year, with customer arrears already rising sharply, New Century admitted accounting errors. News that US prosecutors were also examining its accounts triggered a crisis of confidence among its creditors and the company filed for bankruptcy in April.

"New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy. The increasingly risky nature of New Century's loan originations created a ticking time bomb that detonated in 2007," according to the 580-page report filed with a Delaware bankruptcy court.

"KPMG contributed to certain of these accounting and financial reporting deficiencies by enabling them to persist and, in some instances, precipitating the company's departure from applicable accounting standards."

The writer of the report, the court examiner Michael Missal, said KPMG could face lawsuits claiming professional negligence and misrepresentation, but KPMG dismissed Mr Missal's interpretation.

A spokesman said: "We strongly disagree with the report's conclusion concerning KPMG. We believe that an objective review of the facts and circumstances will affirm our position."

Mr Missal's report showed how New Century repeatedly flouted its own internal rules in order to approve more loans to risky borrowers, and it claimed that KPMG failed to express enough scepticism. Accounting tricks enabled New Century directors to pocket bigger bonuses, Mr Missal said.

A New Century spokesman said the company was pleased the examiner's report had been completed so the company's plan for liquidation can continue.